Introduction

Monetary authorities around the world remained behind the scenes in discussions about payments technologies until the debate shifted to the possibility that “money,” principally in the form of cash, might eventually be issued digitally. This development has given rise to what has since been called CBDC. The ongoing COVID-19 pandemic has only served to raise the stakes even further as some businesses became reluctant, or refused outright, to accept notes and coins as a form of payment.2

At a minimum, CBDC has the potential to replace the traditional role of notes and coins in circulation. More broadly, CBDC creates the possibility that additional services can be provided through digital means.3 The introduction of CBDC also has the potential to transform central banking. For example, CBDC may offer, depending on its form, the option for individuals to hold balances at the central bank, as well as the option to compensate the holders of CBDC.4 At the global level, CBDC can ease the burden and costs of transacting in different currencies, thereby facilitating, if not encouraging, cross-border payments. The latter is deemed a priority issue of the G20.5

Beyond the surge in electronic forms of payment due to COVID-19, why is there so much interest in CBDC? First, central banks around the world, whether they are AEs or emerging market economies (EMEs), agree about many of the motivations for adopting a CBDC, with financial stability and monetary policy considerations

2 For example, in May 2020, the Bank of Canada asked retailers to continue accepting cash even though the central bank “recognizes that these measures are being taken with the safety and well-being of both staff and consumers in mind.” See Bank of Canada 2020. Heng Chen et al. (2020) later confirmed that consumer demand for cash actually increased. The author returns to discussing this phenomenon below.

3 In what follows, the author will not discuss cryptocurrencies. Many authors have drawn attention to the confusion surrounding what is meant by a CBDC (for example, Meaning et al. 2018). Moreover, there is also a difference between CBDC and stablecoins. The latter are a private sector creation ordinarily backed by physical or financial assets (for example, gold, dollars).

4 The emerging CBDC literature does not make sufficiently clear that commercial banks offer an array of services well beyond merely providing interest income to their customers. Indeed, in several countries, bank income from non-interest sources, including service fees, has tended to rise over time. Proposals to create CBDC, published by central banks and some international agencies, clearly state that central banks are not expected to emulate the range of services offered by banks.

5 See, for example, www.g20.org. topping the list, at least they do according to a recent survey conducted by the Bank for International Settlements (BIS) (see, for example, Boar, Holden and Wadsworth 2020).6

Yet, governance- and data collection-related issues, for example, have not attracted the same attention, even if some observers to date have indicated discomfort with the current state of legislation and regulation in this connection (see, for example, International Monetary Fund [IMF] 2020).

Second, there has been considerable emphasis placed on how CBDC can improve the efficiency and safety of payments systems (see, for example, BIS 2020). Whether CBDC offers the chance to enhance oversight and provides a safety net of sorts for payments systems remains to be seen. However, there remain underappreciated factors, exacerbated by the pandemic, from the introduction of CBDC. Two are worth highlighting. One is cultural; the other more technical in nature. The cultural one comes from the well-known tendency in some countries to continue to rely on conventional notes and coins as the preferred means of payment (for example, as in Germany, Japan, Switzerland and the United States).7 Even in countries most favourable to a CBDC (for example, Sweden), policy makers have been asked to slow the process in order to further consider the broader societal implications of the rise of the digital economy (see, for example, Alderman 2018).

It is worth noting that, globally, there already exist a large number of networks for real-time settlement, although not all are on an equal footing in terms of their readiness. Readiness and resilience are critical ingredients, given that, in legal terms, settlement in cash is considered final.8 This is on top of retail payment systems,

6 Other motivating factors include facilitating financial inclusion, improving the efficiency of payments systems, and reducing the costs of and easing cross-border payments.

7 Surprisingly, perhaps (see also note 2), there has been a noticeable shift to holding more notes and coins in some AEs. In particular, the data reveals growth in the holding of large-denomination notes. Thus, for example, the European Central Bank is phasing out the €500 note in response to some of these concerns, although the decision predates the arrival of COVID-19. Jonathan Ashworth and Charles A. E. Goodhart (2020) also note changes in holdings of large- versus small-denomination notes in several countries. The ongoing pandemic is revealing that largedenomination notes may also be held for precautionary purposes (see

Chen et al. 2020).

8 The authorities are aware of the need for “interoperability”; domestic interoperability between retail and wholesale systems is common in AEs while cross-border interoperability remains a work in progress.

where delays in settlement imply some residual risk, at least compared to cash transactions. Whether these risks may be ignored or hedged is a different issue. Nevertheless, cyberthreats, and the capacity of the authorities to contain them, both downplayed by central bankers at least until recently (see, for example, Carstens 2021), signal that the introduction of a CBDC raises risks of a different kind than with conventional notes and coins.9

It is worth repeating that the introduction of CBDC would take place in an environment where other forms of electronic and digital payments have become commonplace. Credit and debit cards, not to mention other forms of payment such as cash or gift cards, have become popular and are used widely.10 Moreover, interbank networks have already emerged (for example, Interac in Canada, China UnionPay in China, STAR in the United States and LINK in the United Kingdom) to facilitate the transfer of funds at both the retail and the wholesale level. It is not inconceivable that these networks will adapt to new future needs, regardless of the form of CBDC that is introduced. Whether central banks join existing networks, or legislation is required to safeguard the security and other considerations required before CBDC can participate or lead to the creation of new networks, is a work in progress. Nevertheless, the adage that regulation lags innovation is as true today as in the past when policy makers were playing catch-up.11

Finally, the political economy implications from the introduction of CBDC raise a separate set of challenges. These include the loss of monetary sovereignty or in the status of global reserve currencies; a decline in the independence of central banks, not only from governments but also from the commercial banking sector; the role of payments networks as a source of vast amounts of data that can be used for commercial and noncommercial purposes; and, lastly, but arguably most challenging of all, the loss of anonymity that cash transactions incur. While potential disruptions in the conduct of monetary policy and the end of monetary dominance are critical policy questions, the governance of central banks and their possible involvement as holders or dealers of massive amounts of private data have received less attention. Policy advice is urgently needed to offer guidance on these issues.

A recent report by a consortium of central banks (Bank of Canada et al. 2020) admits that complete anonymity in using a CBDC is implausible. It is worth adding that anonymity and privacy can, but need not, coexist. Whether the proliferation of online transactions and card use and, increasingly, smartphones means that some of these concerns are overblown remains in question (see, for example, Warzel and Thompson 2019). For example, cards and smartphones underscore the role that “loyalty” plays in transactions technology but at the loss of anonymity (see, for example, Amamiya 2019). Japan is one, but not the only example, where government intervention also skews the technology adopted for payment with implications for identifying individual transactions. An experiment was undertaken in Japan in 2019 in an effort to blunt the impact of the increase in the consumption tax from eight percent to 10 percent. The fiscal authorities decided to favour digital transactions through a discount program.12 Central banks are keenly aware of the issues, but the bottom line is that no technology is able yet to provide foolproof anonymity with digital transactions (see also, for example, Bindseil 2020).

9 While the traditional threat of counterfeiting notes still exists thanks to technological developments in recent years, advances such as increasing reliance on polymer notes and enhanced security features on existing notes have contributed to reducing the threat. The creation of a Central

Bank Counterfeit Deterrence Group (www.rulesforuse.org/en/currencieslist) has also helped. See Richard Finlay and Amy Francis (2019) for an engaging recent history of counterfeiting.

10 Indeed, commercial banks, and many non-bank competitors, have also adopted technology alongside existing notes and coins in circulation, first through the spread of automated teller machines (ATMs), which have, over time, gone beyond simply dispensing cash to online banking, making cross-border payments easier, if costly.

11 There is a long list of such instances. Arguably, the best-known ones took place in the United States, where post-1930s Depression-era legislation failed to adapt to financial innovations created in the 1970s and 1980s, in part, as a means to circumvent existing financial restrictions. (See, for example, Siklos 2006). 12 See www.nippon.com/en/japan-data/h00537/smart-shopping-rewardpoints-and-consumption-tax-hike-exemptions-a-bargain-for-consumers-i.html.